The landscape for commercial real estate and proptech is undergoing significant transformation. Driven by evolving market conditions, shifting work and consumer behaviors, and rapid technological advancements, industry stakeholders face both challenges and exciting opportunities ahead.
We recently sat down with two leading innovators in the sector. Anthony Romano is the CEO of CREtelligent, a leading national provider of end-to-end decision analytics and due diligence solutions for the commercial real estate ecosystem, while Bob Gillespie is a Managing Partner at Second Century Ventures, a venture capital fund focused on promoting innovation in the real estate industry and an investor in CREtelligent. Together, Anthony and Bob explore the key trends shaping the future of commercial real estate, the factors influencing market performance, and how innovative proptech solutions are poised to revolutionize efficiency and decision-making across the sector.
Commercial real estate is a broad term. How do you define it?
Proptech helps businesses save money, increase revenue, and expand margins.
Anthony: It’s one of two types of real property, the other being residential. While residential real estate encompasses land and property that’s used for housing, such as single family homes, duplexes, and condos, commercial real estate refers to land and property that’s used to generate income. That includes everything from stores and offices to gyms, bars, restaurants, and multi-family rentals to name just a few examples. It’s a massive sector made up of 140 different property types spread across nine different asset classes.
Performance across those asset classes hasn’t been uniform. Where have you seen strength in the sector?
Bob: Industrial, ecommerce, and supply chain have all performed really well over the past few years, as have single-family and multi-family rentals. Specialty real estate, which includes data centers, life sciences facilities, and senior housing, is also getting a lot of investor attention right now. At the other end of the spectrum, offices continue to struggle as a result of hybrid work and retail is in flux as traditional shopping experiences give way to experiential ones.
The move to hybrid work and changes in buying behavior are certainly challenges in some very specific corners of the commercial real estate market. What factors drive success or failure in commercial real estate more broadly?
Anthony: I think the primary driver is the cost of capital. After having enjoyed an almost zero percent interest rate environment for a long time, the series of rapid rate hikes we experienced over the past few years pushed up the federal funds rate, which in turn drove up Treasuries and mortgages. That not only made borrowing more expensive, but also compressed valuations, all of which resulted in less activity in the market and fewer transactions overall.
Even though the Fed has since cut rates by 100 basis points, 10-year Treasuries and mortgage rates still remain high. Fortunately, in spite of that sentiment is starting to change. With asset values coming down, people are becoming more comfortable with the idea of deploying capital again and doing more deals, even at 6% or 7% interest rates. Make no mistake, there are many factors that could put an end to that comfort, like geopolitics, but overall the outlook for 2025 is better than it was for 2024, particularly given the potential for two additional rate cuts this year.
Does a stronger 2025 depend entirely on further rate cuts or are there other factors?
Anthony: No it’s more than that. There’s also the fact that around $1 trillion of commercial real estate loans that were extended a few years ago when interest rates were low are starting to mature. That leaves many borrowers with no choice but to either go into a 6% product or find a bridge or mezzanine solution. Either way, the vast majority of borrowers are going to transact, meaning that they’re going to need the services that CREtelligent provides. We’re pretty excited about that.
Regardless of the macroeconomic environment, fundamentals like housing and data infrastructure remain essential and continue to fuel commercial real estate growth.
Bob: It’s also important to remember that no matter where interest rates go, things still have to get done. People are still going to order stuff they need from Amazon, creating demand for warehouses. They are still going to need places to live, ensuring ongoing demand for rental housing. And they are going to need ever more compute to keep up with advances in technology, which means more data centers. No matter what the macroeconomic picture looks like, underlying trends like these will help spur growth in commercial real estate.
Anthony, you mentioned CREtelligent. Could you give us a quick overview of what the business does?
Anthony: We’re a proptech company with a due diligence platform called RADIUS that provides property due diligence services, analytics, and professional insights to commercial real estate professionals. We work across the entire due diligence spectrum in areas like environmental, property resilience and conditions, land surveys, and zoning to help our clients make better decisions about their commercial real estate transactions.
Can you give us a quick overview of proptech and explain how CREtelligent fits into that overall ecosystem?
Anthony: Proptech is just one type of real estate technology, alongside construction tech, fintech, insuretech, and others. In 2024, it was approximately a $36.5 billion global industry, with around $4.3 billion of growth equity and debt investments in the US alone. It’s also a rapidly consolidating industry, with 90 M&A transactions last year.
Fundamentally, proptech companies are trying to help the business owners we serve save money, increase revenue, and expand margins. That could be by taking days or even weeks out of their processes, by reducing their costs, or by creating better experiences for everyone involved in their transactions.
If you’ve ever refinanced a mortgage, then you know that it’s a process that takes 60 to 70 days, even when you’re working with your existing lender. That’s absolutely absurd and just one of many examples of the inefficiencies in commercial real estate. In proptech, we’re looking for ways to reduce or eliminate as many of those inefficiencies as possible. Some proptech companies do so by focusing on data and analytics or loan originations, while others target transaction management and property management. At CREtelligent, we’re focused on streamlining due diligence management and making it a faster, more efficient, and more effective process.
AI is impacting virtually every technology company right now. How do you see proptech companies using that technology to make these kinds of processes better?
Anthony: There are definitely more and more proptechs adopting generative AI and large language models. One company we know uses generative AI to power the legal review of transaction-related documents. Their platform automatically identifies mistakes in those documents, driving greater accuracy while also saving their customers hundreds of thousands of dollars in legal fees in the process.
At CREtelligent, we use AI to better serve our customers at every step of the process from site selection through to post transaction asset monitoring. For example, a customer recently came to us because they were looking to build subsidized housing in South Carolina and needed to identify properties that met a specific set of criteria in order to qualify for the subsidy. Not that long ago we would have had to spend days or even weeks going through county websites to find all of the properties that met the criteria. Instead, by running the requirements over our AI data fabric, we found 120 properties that fit the profile in about 30 seconds. That’s how truly game-changing AI can be.
On that note, Bob, when you’re evaluating potential investments, how important is the tech when making your decision?
Bob: Of course technology is important, but for me it’s secondary to the end result. Companies are always pitching me about their tech, but the reality is that as we move further along the innovation curve, every technology will become a commodity sooner or later. So when I’m considering a potential investment, I’m less concerned about the tech the company is using and more concerned about whether the problem the company is solving is differentiating.
So making sure that you’re solving the right problem is one challenge proptechs may face. What are some of the other hurdles to building a successful proptech company?
Anthony: One overarching challenge is the fact that technology adoption happens very slowly across commercial real estate. The industry is lagging behind in terms of platform and data analytics adoption, even though there are many solutions capable of streamlining transactions to make them faster and more cost-efficient.
Bob: I agree, adoption is a major challenge. In fact, I remember reading once that the only industry that’s had a slower technology adoption cycle than commercial real estate is farming. If you’re a proptech company, that means that you’d better have sufficient runway and be prepared for very long sales cycles. Another challenge is the fact that the industry is extremely fragmented. If you want to be successful, you have to be prepared to not only sell to the big players who, of course, expect your solution to integrate with their legacy systems, but also to all of the mom and pop and medium-sized business owners out there.
Last question: What do you think is next for proptech? Where do you see the market headed over the next five to 10 years?
Bob: I think we’ll see consolidation and that when interest rates come down, commercial real estate and proptech will benefit. And while AI is the hot topic right now, as I alluded to earlier, within a few years it’s going to be table stakes. That means that going forward the key to success won’t be having AI, it will be implementing it effectively to make business processes better, faster, and cheaper.
Anthony: I think proptechs will be spending a lot of their time helping business owners operationalize their technologies into the business. A lot of business owners have legacy tech stacks and will need our help to adopt new solutions. I also think early-stage tech companies will continue to move away from the growth at all costs mantra and become laser focused on getting to break even as quickly as possible. That’s certainly the approach we’ve been taking at CREtelligent the last couple of years and it has served us well.